Big bank earnings are about to kick off—here are 3 ways to play the deluge

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Can you bank on the banks?

It’s a fair question, considering the uncertainty surrounding financial stocks — as global slowdown concerns and expectations for more interest rate cuts grip the market — but experts haven’t lost hope just yet.

With big banks Goldman Sachs, J.P. Morgan, Wells Fargo and others marking the unofficial start of earnings season Tuesday with their reports, there are still buying opportunities in the exchange-traded fund space that investors can use to capitalize on the moves, two market watchers said Monday on CNBC’s “ETF Edge.”

“This persistent low-rate environment is going to favor the bigger banks,” said Chris Hempstead, top ETF consultant and former head of ETF sales at Deutsche Bank. “The bigger banks have a much deeper capital market structure that they can leverage for revenue that the regional banks don’t have.”

That means an ETF such as the Financial Select Sector SPDR Fund, ticker XLF, could be in a prime position to push higher this week, Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, said in the same interview.

The XLF has outperformed the SPDR S&P Regional Banking ETF, an equal-weighted fund that trades under the ticker KRE, by about 5% year to date.

“[With] the larger companies, which tend to be in more of the market-cap-weighted products like XLF … or the iShares Regional Bank ETF [ticker IAT], you’re going to have more diversification of the revenue stream,” Rosenbluth said.

“It’s not as dependent upon loans and loan growth, but broader areas of revenue that you’re going to have: asset management, wealth management, trading and capital markets,” he said. “That diversification is going to help in a lower-for-longer interest rate environment.”

That leaves questions around the fate of the regional banks, but as members of that subgroup grow in size — with five bank stocks now accounting for roughly half of IAT’s market-cap-weighted portfolio — investors’ choices are expanding as well.

“It highlights how important it is to look inside the portfolio,” Rosenbluth said, noting that if investors compare IAT with KRE, they’ll find a “big difference in the number of holdings, big difference in the size of those holdings and [in] the position — so, roughly 2 or 3% of the assets in those larger regional banks [in KRE] as opposed to 8 or 9%.”

In short, “You’ve really got to look under the hood with ETFs,” Rosenbluth said.

Hempstead agreed.

“We’re always saying, ‘Do your homework, do your research,'” Hempstead said. “IAT — if you want to play PNC and US [Bancorp], that’s the better ETF for you. Most people gravitate to KRE. There’s nothing wrong with KRE, it’s equal-weighted, but people look at it because it has higher volume. But tradability? IAT is right there with it.”

XLF closed slightly higher on Monday. IAT and KRE each sank by less than a tenth of 1%.

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